Tyler Cowen recently discussed which single sentence contains the most valuable insight in the field of macroeconomics. John Lanchester claimed it was “Governments are not households.” Tyler responded:

At the very least I would ask for “In the short run, governments are not households.” I might even consider “Today is a long run from some time back.” And I have a suspicion what Scott Sumner would say.

Throughout keep in mind that 99% of all historic cycles have been “real business cycles,” and that sovereign bankruptcy is a historical norm, even though today many major sovereigns are quite creditworthy.

I like his second idea, which I learned from Robert Lucas. I believe it’s the most important thing that Lucas ever taught me. The RBC comment may be true in terms of cycles in RGDP, which have probably been mostly driven by war, drought, plague, etc. But I’m not sure it’s true for cycles involving mass unemployment of urban workers. (I presume farmers in ancient times were mostly employed, just at more or less levels of activity. Maybe that’s false.) Monetary shocks were causing urban unemployment in the 1700s and 1800s. Even Hume noticed the pattern.

I’m sorry that I can’t come up with a good single sentence, unless I’m allowed to cheat with a compound sentence:

The money (MOA) market drives cycles in employment, as well as long run growth in nominal aggregates, whereas government policies and cultural practices encouraging wealth creation drive long term real growth.

I suppose that’s actually about 4 sentences. I presume Tyler thought I would focus on the monetary part.

My compound sentence is how I see macroeconomics; the rest is details.

If I had to focus on one shorter sentence, it might be:

Money is really important, but no one understands it.

Tyler also asked “In which countries is crude libertarianism most and least true?”

For least true, I nominate South Korea. . . .

For “most true” you might say North Korea, but that is too easy a pick. How about India? Government there has done lots but most of it has worked out quite badly, whereas their deregulations generally have gone well (see our India unit on MRUniversity.com). Further deregulation of the economy would likely be a good idea.

Singapore can be claimed for either category.

I certainly agree about Singapore, which is a sort of Rorschach test for intellectuals. But there are lots of ways of thinking about this question. I’d prefer to think in terms of which examples strongly favor one model over another. North Korea has horrible policies by almost any standard, so whereas even Paul Krugman would view libertarianism as an improvement in North Korea, it doesn’t tell us much more than that.

Here’s a couple examples where the crude libertarian model does pretty well against my more “sophisticated” libertarianism:

1. The Hong Kong currency board

2. Private schooling in India

I think that Hong Kong would do a bit better with NGDP targeting, but I can’t deny that the currency board (sometimes viewed as a crude libertarian approach) has done awfully well. On average unemployment has been low, and although the rate does rise when NGDP growth and inflation fall, the recessions are short lived. Their labor market is fairly flexible. Interestingly, Hong Kong may have the most perfect Phillips Curve in the modern world from 1985-2011. So although crude libertarians may hate the Phillips Curve, and ridicule it, the R2 of around 80% is about the world’s highest in modern times.

I favor education vouchers, because, a priori, I can’t see how poor people could afford to send their children to private schools. But I’ve read that many poor people in India do so, and that the schools are often better than the public schools. That’s a strong “crude libertarian” argument against my views on education.

How about “In which country are cultural explanations of income differences most and least true?”

Most: Malaysia.

Least: Korea (viewed as a single country)

PS. I prefer the phrase “dogmatic libertarianism” or “principled libertarianism” instead of “crude libertarianism.” And I usually call people like myself and Tyler “pragmatic libertarians,” not “sophisticated libertarians.” Why not do so in this post? Just to annoy people. Because I was following Tyler’s terminology.

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Some caution is warranted regarding conclusions about India’s school systems. While I’m no expert, I did just finish reading Katherine Boo’s book. Which leaves me almost totally unqualified to comment, but that won’t stop me.

My impressions of the Indian school system are as follows:
– Like most public institutions in India, corruption is endemic
– For schools servicing the lowest classes, the schools are little more than scams. For the most part teachers don’t show up, etc. It’s just a way to collect some public money from a system with virtually no oversight (and what oversight exists is easily bribed).
– While many poor people send their children to private schools, these private schools are still pretty crap.
– Public schools servicing the wealthy are of much higher quality, as are the private schools.

So ultimately I don’t think it’s necessarily an expression of the truth of libertarianism, so much as an example of cultural practices and government policies leading to a really bad outcome.

Ha! I suppose this is quite true for crude models where Malays and Chinese are the only two ethnic groups in Malaysia. Factoring the Indians in makes this harder, because the levels of poverty in many Indian Malaysian communities are staggering, and yet there is also a thriving Indian Malaysian professional class (which includes one of the richest men in the country, thanks to his government connections that got him some nice telecoms licences).

As for Korea on the same point, I think that’s absolutely correct. It’s really a historical accident that Vietnam is unified today and Korea isn’t. There are more cultural differences between South and North Vietnam than between South and North Korea. The industrial capacity and natural resource wealth levels at independence strongly militated in North Korea’s favour for economic growth. That South Korea flourished economically and North Korea didn’t quite clearly had nothing to do with culture, natural resources, or other initial endowments.

jknarr, in the US maybe. That’s plainly not the case outside the US. This is another reason why I’m not fully comfortable calling myself libertarian, lest I be associated with dogmatic US constitutionalism. (Moreover, the constitution itself can always be amended; if it were amended to permit slavery would slavery now be libertarian? If we are going by a version of the US constitution from a particular point in time, which one would that be? The one permitting slavery?)

Re India that is true. One could make a plausible argument that in Malaysia it’s the Tamils that are worse off and other Indian ethnicities who are better off. I don’t know that the magnitude of cultural differences between different Indian ethnic groups might be enough to explain the observed magnitude of income disparities among Indian Malaysians, though. I know of some Indian Malaysians who blame the legacy of the caste system for wealth/income inequality (the caste system remains culturally observed in certain communities in Malaysia even though it has no legal sanction).

“If you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, ‘Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.'”

The trouble with school vouchers is that kids with less engaged parents are left in underfunded public schools that experience declining parental involvement. It *may* be good for those who take advantage of the vouchers, but it’s definitely not good for those left behind. And the problem is exacerbated when private schools refuse to accept “difficult” students.

Johnleemk – I’m mainly pointing out that I have rarely seen serious libertarian parties or policies outside of the US. There appears some atavistic elements in former UK colonies, but where else?

I’d suggest that the current USC is most appropriate for discussion (although your slavery references must have given you a frisson, even if the topic is totally moot), and yes, the amendment process is appropriate for incorporating changes to its plain-letter meaning.

You’ll note that there is no constitutional court in the USC, only a means for amendment, which can and ought be done when the standards are met. I think that many in the US desire the plain-letter version, and instead find themselves marginalized as “libertarians”, (i.e. called crazy/racist –the refuge of the rhetorical idiot).

An interesting point about the lack of libertarian examples outside the US. Still many of the so-called democracies across the world were right wing dictatorships (or authoritarian to a significant degree) during the Cold War. Clearly socialism and fascism are inherently opposed to libertarian ideals, so how many opportunities have there really been for libertarian ideals to flourish or fail?

To elaborate, modern Malaysian inequality is highly intra-ethnic. It’s not just the Indian professional class; the Malays and Chinese have their own equivalent English-speaking educated elites and dialect-speaking working class.

This is disguised to the extent that ethnic politics enforces ethnic unity, but it comes through quite clearly in the data: per-race Ginis are quite close to the national.

Malaysia works, as an example, if one describes culture as acquiescence to English and industrial lifestyle rather than as culture in the sense of ethnic identity.

The United States was solidly illiberal until the 14th Amendment was incorporated against the states, thus invalidating the morass of religious and puritan laws that had sprung up previously. It is rare for states to surrender their powers this way.

Other economically laissez-faire states – e.g., Hong Kong during the benign-neglect era – were likewise backed up by distant but powerful governments. Libertarianism as a political movement is never viable in any nation where there is no widely (if grudgingly) accepted candidate for arbitration in local politics. Forcing the socialist to accept the sanctity of private property merely makes him yell that fine – but this doesn’t belong to you! Give it up, thief from the people!

Tyler – clearly not enough, I’d put the US at the top of the list, although many wish to equate statism with modernity.

Necessary but not sufficient qualities likely include:
Weak or no standing army, maritime, and a middle-class-supported revolution that encodes a liberal political arrangement – e.g. Netherlands, UK, US. Not too many I can think of.

The trouble with school vouchers is that kids with less engaged parents are left in underfunded public schools that experience declining parental involvement.

The notion that good public schools have “high” parent involvement has not been my experience at all, & I speak as a parent in Westchester County where students in affluent villages are funded at roughly 30k per pupil, most parents are fully engaged & then some, & not one charter school has been allowed entry.

What public schools mean when they speak of “parent involvement in the schools” is that parents are expected to raise & donate money, vote in far-above-inflation tax increases each year, and “help with homework.” “Help with homework” means that parents re-teach content at home or hire tutors to do so.

Needless to say, students whose parents do not possess the means to “help with homework” struggle.

In short, “parent involvement” does not mean that parents are involved in the **school.** It means that parents, at home, remediate the school’s failures. The school takes the credit for the higher scores produced by parents serving as ghost teachers.

My experience of parent involvement in Seattle’s public schools is quite different than yours. But I think you missed my point. Question for you: if school vouchers are introduced, and some parents take advantage of them, will the kids remaining in the public schools be better or worse off?

The point I’m making is that I plainly disagree with your attempt to identify US constitutional originalism and libertarianism as synonymous. There are libertarians across the world who don’t give a whit about what the plain text of the US constitution currently says. Certain principles underpinning US governance are synonymous with libertarianism — but the plain text of the US constitution is no more *the* source of libertarian principles than the plain text of John Stuart Mill’s or Friedrich Hayek’s compiled works.

To repeat, if the plain text of the US constitution is all that matters, should a libertarian in the 1860s have endorsed slavery? If the plain text of the US constitution as it stands today is all that matters, should a modern libertarian endorse intellectual property laws, a government-established postal service, or eminent domain?

To a non-American libertarian (of which there are plenty, even if libertarian movements don’t exist on the same scale that they do in the US — note the Mont Pelerin Society is named after a place *in Switzerland*), conflating libertarianism with dogmatic worship of the plain text of the US constitution is akin to conflating social democracy with the dogmatic worship of Das Kapital or the NHS.

“As opposed to what we have now…” . . . except that vouchers would accelerate the trend of declining public schools, which wouldn’t be good for the kids left in public schools. Even for students taking advantage of vouchers, the evidence is ambiguous. See http://nepc.colorado.edu/thinktank/review-vouchers-college.

Migration between schools can be self-reinforcing: motivated parents and kids leave public schools for private ones, and public school quality declines, which prompts a further exit from public schools, etc. And the same thing would happen in reverse if public school quality were to improve.

If you care about equality of opportunity, and the future prospects of the least well-off in particular, then improving public schools would arguably be a better option than vouchers, especially if private schools are free to select among student applicants.

Public schools can borrow and expand upon community time bank options, to reintroduce important subjects not necessarily funded either publicly or privately. In fact, a long term focus on (equal time share) subject expansion of all kinds would allow low income students to gain advantages not necessarily available in private schools.

It’s never clear to me that libertarianism accepts public goods and externalities. Classical, Smithian liberalism does. I think of myself as a classical liberal, not a libertarian (an ugly word at that).

Of course, we are also missing a whole ideology: (social) conservatism. Both libertarianism and classical liberalism treat the individual as the unit of analysis for purposes of optimization, with the difference that classical liberalism allows for market failures. But both seek to maximize individual property rights.

By contrast, the unit of analysis for conservatism is the group. Policy is taken for the benefit of the group as a whole, not for its individual members. Thus, drafting a young man and sending him off to war is profoundly illiberal, but quite acceptable, and indeed necessary, for conservatism and for society as a whole.

Conservatism is also necessary for specialization. If men and women have different social and biological roles, then they cannot be equal in every sense. And that’s what we see in real life. Now, if you try to force people to be equal, when they are not, then everyone will feel a bit stressed, as some of their fundamental impulses will be de-legitimized, and some of their inherent weaknesses will go unchecked. If I use a football team analogy, an offensive guard would be considered a failure for not being the quarterback in a liberal system. In a conservative structure, it is the group outcome which matters, and it is not equality, but rather appropriate contribution to the group which has value. If an offensive lineman is a good blocker, then he has good standing on the team, even if he can’t run very far or fast.

So conservatives will tend to think in terms of systems, and these systems will tend to be defined by expectations and agency roles. The offensive lineman has a role which is common to all offensive lineman. His legitmacy is attained by fulfilling his role.

Thus, for example, when I yield my seat to a pregnant woman or the elderly man on the subway, I expect no repayment from them at all. Rather, this is the system of social conservatism in which I also have rights and obligations, and overall, it may work well, even though an action was not concluded on a bilateral or transactional basis. I was not giving my seat to the pregnant woman because I personally felt that way (I usually don’t), but because I, as an agent (able-bodied man), was working in a system that required I yield to another agent(physically less able person). So conservatism as a theoretical matter is about the group, agency and systems.

This is quite important from the view of, say, a Charles Murray. He argues that elite liberals are strict with their own children by lax with those outside their own families. This is because coastal liberals (to use a kind of stereotype) feel guilty about imposing their views on others, because, well, we’re all equal, aren’t we?

In a socially conservative model, we are not. Tom Brady, not his offensive tackle, calls the plays. Bill Belichik , the Patriots coach, not the offensive lineman, calls the offensive and defensive schemes. The deference of the lineman to the quarterback and the coach is essential to the success of the team. Social leadership can be taken as an analogy.

It is those who need discipline and leadership who benefit from it the most, and the failure of superiors to impose it constitutes a dereliction of duty in conservative theory. (And that’s a bit of Singapore, too.)

Now, paternalism and conservatism have all sorts of problems, as do egalitarianism and pure libertarianism. (And that’s why all three ideologies persist!) The point of my comment is not to declare individual rights to be hollow, but to point out that there is an on-going tension between the rights of the individual and the rights of the group, and both need to be considered.

So, it’s great to talk about libertarianism and egalitarianism, but without conservatism, you are not really talking about the whole spectrum of ideology.

Greg, Those students are already left in poor schools even without vouchers. With vouchers at least some escape. BTW, I favor universal vouchers. I would abolish the public schools. All students (except the very rich) would use vouchers.

Steven, Good points, but I would add that it’s not clear that the government is best suited to impose conservative values. Society can and often does do that on their own, without governemnt regulations.

My problem with conservatism is when the government tries to do things like ban drugs, gambling, prostitution, etc. (To of those three are legal in “paternalistic” Singapore, but the third is VERY illegal.)

I am saying that most libertarians in the US are mostly original constitutionalists, despite the opinions of outside-of-US libertarians you speak of. The constitution is quite popular in the US, libertarians are less so. Bit of cognitive dissonance here.

Unfortunately, your focus of the 1860’s is also frankly bizarre. Perhaps we also need to go endorsing a search for the source of the Nile as well. Sounds a bit boring, really. But really, keep whacking away at your old chestnuts if you must.

Your issues with the US constitution also have a distinct odor of dogma. It’s a bit sad how libertarians cannot agree, wouldn’t you say? Probably explains why we live as we do.

“I usually call people like myself and Tyler ‘pragmatic libertarians’, not ‘sophisticated libertarians’.” Wouldn’t the British call you “wet libertarians”–“wets” for short? (Murray Rothbard, for example, would be a “dry.”)

“The money (MOA) market drives cycles in employment, as well as long run growth in nominal aggregates, whereas government policies and cultural practices encouraging wealth creation drive long term real growth.”–Scott Sumner.

Brilliant synopsis. That’s it, right there.

As a quibble, I might add in “real growth” is defined by measurable output.

A nation might decide to work less, take more leisure time, and would have a smaller GDP as a result. Time with family, recreational time usually doesn’t get counted.

Scott: Like I said, I was pretty much shooting from the hip based off of Katherine Boo’s absolutely fantastic book (which, obviously, I’m in love with). I got the impression that the private schools that the poor have access to are a step up from the public schools (teachers show up more than one day in four), but they’re still pretty crappy relative to what those higher up the income/wealth ladder have access to.

Jeff, Thanks. I’d add that with a billion poor people in India, any solution will be in the “less bad” category. Not saying unsubsidized private schools are the answer (recall I support vouchers) but they may help.

Scott, I note you still haven’t provided a definition and I can’t reverse engineer one from the few examples you’ve provided. No need to reply. I’m sure you’ll be writing another post with MOA in it this year, maybe you can be more explicit about your definition when that time comes.

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Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.